Phillip Ashley Dickson v Geoffrey Philip Reidy

An equity of exoneration operates in the nature of "a charge upon the estate of the principal debtor by way of indemnity for the purpose of enforcing against that estate the right which [the beneficiary] has, as between [the beneficiary] and the principal debtor, to have that estate resorted to first for the payment of the debt": Gee v Liddell [1913] 2 Ch D 62 at 72. Thus, where co-owners mortgage their property so that money can be borrowed for the benefit of one mortgagor, the other has an interest in the property of the co-mortgagor whose property is to be regarded as primarily liable to pay the debt". (See also Farrugia v Official Receiver in Bankruptcy (1982) 43 ALR 700 at p 702, and, relevantly, at p 703 where Deane, J held that the charge which Mrs Farrugia had upon her husband's interest in the property by way of indemnity to secure her right of exoneration was not obliterated by his bankruptcy, and that his interest which passed to the official receiver was subject to it). 27 In Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116 Bryson, J at pp 129-130 observed that the doctrine of exoneration depends on the presumed intention of the parties and continues to exist to supply a presumption of the intention of parties as to who should be principal and who should be surety. He said (p 130): " … The doctrine serves to illustrate that the intention of a party may establish which is to stand as surety and which as principal even though both appear to incur substantially the same legal obligation. Although contemporaneous agreements, arrangements and expression of intention are the usual sources of evidence about the intentions of parties on such a subject, there is no reason why their intentions may not be inferred from the circumstance in which they acted. Intentions, like other facts, may be proved from circumstances. Circumstances could conceivably furnish very clear proof of intention as to who was to be principal and who was to be surety, and the intended and actual application of funds raised when two persons incur a common liability would often have an important, even predominant part in the proof of the relevant intention". 28 It is to be remembered that the doctrine of exoneration is based on an inference in each case from all the facts of that particular case. (Hall v Hall (1911) 1 Ch. 487 at p 498). 29 For the Defendant it is submitted that the equity of exoneration does not apply to any of the loans in this case because it has not been shown that they were for the substantial benefit of the wife and it is not enough to show merely that she received some incidental benefit. For example, it was said the loan of $70,000.00 was to benefit the wife's employer, Mr Page, and not her. It was also put that the purpose of the loan of $343,000.00 was to repay the $70,000.00 loan, to pay $100,000.00 off Mr Lam's loan to the benefit of both the Plaintiff and his wife, and to provide funds to the wife for the acquisition of an interest in Mr Page's business. 30 It was also put that for the Plaintiff to succeed it was necessary to show that it was his intention to act as if a surety for his wife in respect of each loan, and that the evidence does not prove such intention. 31 In summary, the Plaintiff submitted that the facts demonstrated that each of the transactions was entered into wholly for the benefit of the wife, that the monies obtained were wholly subject to her direction and control, and nothing was received by, or subject to the control or direction of, the Plaintiff. It was put that each transaction was entered into in the expectation that the loan for which the property was provided as security would be repaid by the wife, or from sources over which she had control, or by others with whom she was associated. 32 In my opinion the Plaintiff's submissions should be accepted. I find that the evidence establishes that all the loans were arranged on the wife's initiative and that she prevailed upon the Plaintiff to join with her in providing their property as security for them. The circumstances of each transaction show that in agreeing to his wife's proposal he intended to stand in the position of a surety to support the loan with the understanding, as was the fact, that the whole of it was for her use and benefit and not for his. I also find that the evidence shows that the disposition of funds raised by the loans was wholly at her direction and under her control, and that the Plaintiff received no benefit from any of them or, with the exception referrable to payment of $100,000.00 off Mr Lam's loan, expected that he would. 33 In my view the fact that the funds were raised and applied for the use of the wife without benefit to the Plaintiff is sufficient to attract the doctrine (cf, e.g., Lin v Official Trustee in Bankruptcy (2002) 187 ALR 220 paras 23-26). The equity is not confined to a situation in which the liability is incurred to discharge a debt or obligation personal to the co-owner of the secured property. Thus, for example, in the circumstances of this case, it is not of significance that the wife caused the $70,000.00 to be made available for the payment of Mr Page's rent. Also, the fact that funds were raised in one case by forging the Plaintiff's signature on the mortgage document has no significance when deciding whether he has a right of exoneration in respect of that transaction. 34 Insofar as the evidence does not establish the destination of some part of a particular loan, nevertheless when the whole of the evidence is taken into account there is ample basis for the inference that it was probably spent in furtherance of the wife's interests. Having regard to the uncontradicted evidence that the Plaintiff received no benefit, it seems to me that the only rational conclusion is that the whole of each loan was in fact availed of by the wife for her purposes, and I so find. Reinforcement for this conclusion is the evidence of the length to which she was prepared to go to secure the monies by way of threatening divorce proceedings, and forging the Plaintiff's signature, and not causing payment to be made to Mr Lam. 35 Accordingly, I hold that the Plaintiff has established a right of exoneration in respect of each of the loans and, finally, in respect of that from Lawteal Pty Ltd on 14 February 2003 of $470,000.00. As a consequence the Plaintiff has established a charge on his wife's interest in the property to secure that right, which property has passed to the Defendant subject to the charge. 36 However, for the Defendant it is submitted that the benefit of the charge was lost in the circumstances in which the sale of the property took place and the net proceeds distributed so that the Plaintiff is left only with a claim as an unsecured creditor against the bankrupt wife's estate. 37 In support of the submission reliance is placed upon correspondence between the parties' solicitors and with Sharah & Associates, solicitors, between 29 May and 8 August 2003 concerning the sale of the property. It is put that the correspondence which conveys the Plaintiff's instructions as to settlement is evidence that he no longer maintained his claim to a charge and, in effect, acquiesced in proceeding with settlement on the basis that there was no charge or, in effect, that he had abandoned it. 38 By their letter dated 29 May 2003 to the Defendant's solicitors the Plaintiff's solicitors claimed an equity of exoneration and consequential entitlement to the whole of the wife's share of the net proceeds of sale under the contract made on 29 April 2003. It was foreshadowed that proceedings would be taken against the Defendant to enforce this right and an assurance was sought that the Defendant not deal with her share of the proceeds pending determination of the claim. 39 By letter dated 3 June 2003 the Defendant's solicitors wrote to the Plaintiff's solicitors stating agreement to proceed with the sale on the basis that the Defendant received 50% of the net proceeds. 40 By letter dated 4 June 2003 the Plaintiff's solicitors wrote to the Defendant's solicitors agreeing to the sale. It included the assertion that the Plaintiff had an action against the Defendant which he intended to pursue, and the request for the assurance was reiterated. 41 By letter dated 5 June 2003 the Defendant's solicitors wrote to the Plaintiff's solicitors in the following terms: "Our client cannot give the undertaking requested by your client, when your client has not put forward any evidence to support its claim. Our client as trustee has certain duties and obligations conferred upon him by the Bankruptcy Act. Our client would be in breach of those duties if it were to give the undertaking to your client in circumstances where your client has not and will not put forward any evidence to support their claim. Accordingly, any settlement proceeds that our client receives will be dealt with in the ordinary course of the administration of the estate of Terri Louise Dickson. Our client is prepared to grant the purchaser early access to the premises on the grounds set out in your letter subject to the following conditions: (i) the rent paid by the purchaser is market rent, and (ii) a fresh contract for sale is entered into by all the parties on or before 6 June 2003, (iii) settlement of the property occur on or before Wednesday of next week. Please let us know if your (sic) agrees to the above terms. If so, please provide us with a draft of the undertaking and details of the rental to be paid by the purchaser". 42 By letter dated 6 June 2003 the Plaintiff's solicitors wrote to Sharah & Associates instructing them to act for the Plaintiff on the proposed sale of the property. 43 On 2 July 2003 Sharah & Associates instructed the purchaser's solicitors on the disposition of the proceeds of sale. Item 12 directed the net balance of the proceeds be divided equally between the Plaintiff and the Defendant. On 6 August 2003 Sharah & Associates further instructed the purchaser's solicitors to the same effect. 44 On 8 August 2003 settlement took place, and the net balance of the proceeds of sale were paid as directed (see para 5). 45 For the Defendant it is submitted that the instructions given by Sharah & Associates on 2 July and 6 August 2003 that the net balance be paid equally to the parties following the letter to the Plaintiff's solicitors from the Defendant's solicitors of 5 June 2003 constitutes a waiver by the Plaintiff of his rights against the Defendant, or an election to abandon or not enforce them. (Orr v Ford (1989) 167 CLR 316 at pp 337-338; Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56 at paras 57-62). 46 In my opinion there is no substance in the submission. Having regard to the circumstances in which those instructions were given they cannot be reasonably understood as evidencing the Plaintiff's abandonment of his claim against the Defendant. The prior correspondence between the solicitors contradicts that conclusion. 47 Further, in my opinion, it cannot be said that by giving these instructions the Plaintiff was accepting the Defendant's proposal that the settlement proceeds received by him should be dealt with in the ordinary course of administration of the wife's estate as stated in the letter of 5 June 2003 and without regard to the equity claim. It is plain that the matter about which agreement was sought in the final paragraph of this letter was the basis upon which the purchaser be granted early access to the property, and had nothing to do with agreement on the Defendant's position. The correspondence relied upon indicates that there was a distinction between how the purchaser's solicitors were to dispose of the net balance of the proceeds of sale and the Plaintiff's claim in respect of the Defendant's share upon his receipt of them. The Defendant's submissions fail to take account of this distinction. 48 Furthermore, of course, there was no evidence from the Defendant that he proceeded with settlement on the basis that the claim had been abandoned, or that he had been prejudiced as a consequence of the net proceeds being distributed in the way they were. 49 Accordingly, I hold that the Plaintiff did not lose the benefit of the charge in the circumstances in which settlement took place and the net proceeds were distributed to each of the Plaintiff and the Defendant. 50 The Defendant's final submission was that, assuming the Plaintiff has established his claim, the amount recoverable should be limited to the remaining funds in the bankrupt estate after payment of monies in the ordinary course of its administration which is said to total about $78,000.00. In my opinion the submission must be rejected. The wife's interest in the property passed to the Defendant subject to the charge. The proceeds of sale received by the Defendant were likewise charged to the benefit of the Plaintiff (paras 26, 35). The Defendant had been on notice of the claim since the letter to his solicitors of 29 May 2003 earlier referred to. Conclusion 51 For these reasons the Plaintiff is entitled to a declaration in terms of para 1 of the summons, and I propose making orders that the Defendant pay to him the sum of $115,313.30 together with interest calculated from 8 August 2003. 52 In the circumstances I expect the parties to agree on the terms of the final orders to be made including questions as to interest and costs. It is appropriate that I direct the Plaintiff to bring in short minutes and to afford the parties the opportunity to address me in relation to any outstanding issues. Arrangements should be made with my Associate by 4pm 16 December 2004 for the re-listing of the matter. **********

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Judgment (8 paragraphs)

Parties

Cases Cited (6)

Cited By (2)